Obama Offers More of the Wrong Medicine on Medicare

Dec. 03, 2012

The latest fiscal cliff plan from President Obama promised $400 billion in entitlement savings. An analysis by the Washington Post of the likely composition of those "savings" showed that nearly half of those cuts would come from requiring prescription drug rebates in Medicare. That would be a huge mistake for the country's fiscal and physical health.

Americans are living longer lives, and the additional years of retirement are putting a strain on Social Security and Medicare. But raising the retirement age - a bipartisan cost-cutting favorite - is deeply problematic unless Americans are healthy when they reach their mid-60s and beyond. That depends on continued medical innovation.

But medical technology companies are already looking at an estimated doubling of their effective tax rates thanks to the new Obamacare excise tax coming next year. And innovation on the pharmaceutical side is severely hampered by the massive cost of FDA regulatory compliance, the trial lawyer tax of abusive lawsuits, and the free-rider problem created by the rest of the world imposing price controls that force Americans to carry the cost of drug research and development.

When you factor in the costs of all the drug research that doesn't pan out, the total cost of bringing a new drug to market is in excess of a billion dollars - and there's always the risk that a lawsuit will turn a blockbuster winner into an after-the-fact loser. For a drug to make it all the way through the development gauntlet and then face an arbitrarily-imposed Medicare rebate would add one more disincentive to develop new cures. And that makes it that much less likely that a breakthrough treatment for heart disease, obesity, or Alzheimer's will enable Americans to remain healthy and productive longer. Not to mention that caring for people suffering from these chronic conditions will be much more costly if cures are not developed.

Genuine health care reform should therefore focus on getting the incentives right for developing cures. Repeal the medical device tax. Reform the FDA approval process. Limit abusive lawsuits. And get tough with other countries diplomatically to loosen their price controls so the U.S. market doesn't have to cover all of the fixed costs of research and development.

Obama already used Medicare as a piggy bank for more government spending when he raided $716 billion to spend on Obamacare. Those brute force cuts mean below-market reimbursement rates that risk shortages of doctors, hospitals, and nursing homes. They are also unlikely to be effective fiscally, because when shortages become acute, political pressure will become irresistible to reverse them. Applying the same slash and burn philosophy to prescription drugs via rebates to pay for a fiscal cliff deal would repeat the same mistake.

Medicare Part D is the only entitlement program in history to come in with costs under its initial projections - 43 percent under, in fact. Premiums have remained low because plans compete for seniors, who have become sophisticated consumers - and because private plans use their purchasing power to negotiate rebates that are applied to premiums. If Medicare mandated its own rebates, as Obama is proposing, they would displace these private rebates and raise premiums for seniors 19.6 to 39.4 percent according to an analysis by former CBO director Douglas Holtz-Eakin.

Real Medicare reform would unleash the power of competition and choice by replacing the rest of Medicare's one-size-fits-all approach with a system that empowers seniors to choose between competing plans. That's precisely what Paul Ryan proposed, and it didn't prevent the Romney-Ryan ticket from scoring a 56-44 advantage among seniors on Election Day.

The politics of Medicare have changed. The American people now understand that resources are limited, and there will not be unlimited medical care for everyone forever. With that fantasy laid to rest, we have to choose either a model that relies on competition and choice or a model that empowers politicians and bureaucrats. Prescription drug rebates would be another step in the wrong direction.